Hertz Faces Shareholder Lawsuit Over Airport Business and Advantage Sale

Laura Layden, Naples Daily News

- Dec 30, 2013 8:00 am

Skift Take

Shareholder lawsuits like this one usually get dismissed or settled. A trial seems as likely as Hertz launching an airline.

— Dennis Schaal

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An unhappy shareholder from Connecticut has taken the driver’s seat in a class-action lawsuit brought against Hertz Global Holdings Inc., alleging fraud and violations of federal securities laws.

The suit [embedded below], filed in U.S. District Court in New Jersey, also names Hertz’s CEO Mark Frissora and its former chief financial officer, Elyse Douglas, as defendants, accusing them of misleading investors about company finances and future prospects, and artificially driving up the company’s stock price.

Shares fell by more than $4 a share in September after Hertz revised its financial guidance for the year, lowering its revenue and earnings projections based on weaker demand for car rentals at U.S. airports.

Over the past year, share prices have ranged from $15.66 to $27.75. On Friday, shares closed at $25.75.

The rental car giant will soon build a new world headquarters in Estero, relocating from New Jersey.

A flurry of law firms announced investigations and plans to file class-action cases against Hertz after the company reported disappointing third-quarter earnings on Nov. 5, which led to another stock price drop.

“We strongly deny all of the allegations and we are going to vigorously defend them because we believe these lawsuits have no merit,” said Richard Broome, Hertz’s executive vice president for corporate affairs.

Pedro Ramirez Jr., who lives in Riverside, Conn., was the first to sue. The Nov. 20 suit includes no personal information about the investor, who couldn’t be contacted for comment.

Court records show he purchased 175 shares of Hertz’s stock on July 29, paying $26.25 a share.

Ramirez is represented by three law firms in New York and New Jersey. The attorneys couldn’t be reached for comment.

Cases like this one, sometimes described as “strike suits” by critics, are not uncommon after a public company announces missed earnings, or other disappointing news that causes stock prices to drop. On average, more than 150 of them are filed in a year, according to The Stanford Securities Class Action Clearinghouse, which works with Cornerstone Research to track all securities class-action suits filed in federal district courts.

“It has gone up and down regularly since 2000 — 2001 was when they spiked and that was during the dot.com era,” said Kamal Hubbard, a content manager and legal analyst for the clearinghouse website.

Half of the cases end in a settlement, with 25 percent or more of the award usually going to the plaintiffs’ lawyers, he said.

“Less than 1 percent actually go to trial and most are settled or dismissed,” he said. “Some cases are dismissed within a matter of months. Some are dismissed within a matter of years.”

While law firms might score big when the cases are won, individual investors typically only recover pennies on the dollar for their losses.

The class-action against Hertz contends Hertz “lacked a reasonable basis for the positive statements about its business, earnings and prospects,” from Feb. 25 to Nov. 4, the time span covered by the lawsuit.

In a Nov. 4 report to investors on its quarterly earnings, Hertz announced third quarter results, reporting profits fell to $214.7 million, or 47 cents a share, down from $242.9 million, or 55 cents, a year ago.

While it saw record third-quarter revenues, the company took a hit from higher expenses — and costs driven by the financial woes of Simply Wheelz. On the news, shares dropped $2.50, or 10.5 percent, to $21.30.

The class-action alleges Hertz failed to disclose:

*It was losing sales at airports, which offer higher rental prices and margins than neighborhood locations.

*Its exposure to the insolvency of Simply Wheelz LLC, which does business as Advantage Rent a Car.

*A disagreement over the value of the assets of the Advantage fleet.

As part of the acquisition of its Dollar-Thrifty rival last year, Hertz was forced to sell off its Advantage brand. The suit alleges Hertz artificially inflated the value of its Advantage fleet, contributing to a misleading outlook.

Advantage — owned by Franchise Services of North America NA — filed for Chapter 11 reorganization on Nov. 5, with a buyer in mind. Catalyst Capital Group Inc., based in Toronto, expects to buy the business, but still needs final court approval. It was the top bidder at a Dec. 9 auction.

The class action also alleges investors like Ramirez were deceived when stock sales were made in unusual amounts at unusual times by Hertz’s former private equity owners, and by Douglas, who resigned from Hertz on Oct. 1.

From March 8 to May 8, the private equity group sold off almost all of its remaining shares in Hertz for $4.44 billion. The suit alleges the group’s members had “access to confidential, non-public information about the Advantage spin-off and the adverse effects it would have on Hertz.”

From April 15 to May 15, Douglas sold 147,758 of her personally held shares for more than $3.6 million. In September, she announced she was stepping down for personal reasons, saying she couldn’t relocate to Hertz’s new headquarters in Estero.

In a mid-December letter to the judge assigned to the case, Peter Pearlman, a partner in one of the law firms representing Ramirez, contended no answer is due from the defendants until after the judge has appointed a lead plaintiff and approved the lead counsel.

Under the proposed schedule, the lead plaintiff, once appointed, would have 45 days to file a consolidated and/or amended complaint, or to decide whether to go ahead with the original suit. Hertz and the other defendants would have 45 days after that to answer the complaint.